New Eni CEO may shut unprofitable refineries

Eni’s biggest program of refinery closures would be a radical attempt by its new CEO Claudio Descalzi to deal with continued overcapacity in Europe’s refining sector.

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By NIDAA BAKHSH and MARCO BERTACCHE

Bloomberg

Former Eni SpA CEO Paolo Scaroni promised Italian unions he
wouldnt shut the companys money-losing oil
refineries until 2014. Now the new boss looks ready to wield
the ax.

Eni has begun negotiations to close as much as half its
774,000 bpd capacity and put more than 3,500 jobs at risk,
according to the industrys main union, which started a
strike at one plant on July 15. Enis biggest program of
closures would be a radical attempt by new CEO Claudio
Descalzi to deal with overcapacity in Europes refining sector,
where the regions economic slump and competition from
Asia has forced shutdowns and caused bankruptcies.

Descalzi, who headed the profitable exploration and
production unit before his promotion in May, will probably
get backing, at least tacitly, from his largest shareholder:
the Italian government. While closing the plants would cause
job losses as unemployment stands at 12.6%, Prime Minister
Matteo Renzi supports change at state-backed companies and
has sought to weaken union power within his Democratic Party.

Renzis message to make companies more efficient
is very clear, said Nicolo Sartori, an energy analyst
at Romes Institute for International Affairs. If
Eni wants to cut costs and tackle
inefficiencies, probably Descalzi will touch the refining part of the business.

An Eni official declined to comment on any potential
closures, saying a new strategic plan that includes the
refining and marketing unit will be stated on July 31.

Sicily Plant

Workers are striking at Enis Gela plant in Sicily,
Filctem-CGILs regional secretary-general, Giuseppe
DAquila, said by phone. Gela may not get a 700
million-euro ($950 million) upgrade, unions said after
meeting Descalzi in Rome last week.

Closing the plants would cut Enis Italian workforce by
about 13%, based on data in the companys fact book.

Enis new CEO may emerge as a male Italian version
of Margaret Thatcher by going up against the unions,
analysts at Sanford C. Bernstein & Co. led by Oswald
Clint, said in a note. While investors thought plant closures
could never happen, Italian press suggests such a plan
is brewing and being discussed with unions, which is
remarkable.

Thatchers government sought to reduce union power in
the UK during the 1980s, forcing through a program of
coal-mine closures in the face of a year-long strike.

Export Market

European refiners have struggled to turn a profit as
recession curbed demand for fuel, more efficient plants
opened in Asia and the Middle East and the boom in U.S. oil
production closed a major export market. That led to more
than a dozen plants shutting, the biggest wave of closures
since the 1980s.

The now-bankrupt Petroplus Holdings closed sites across the
region after struggling to find buyers, while Frances
Total accepted union demands, promising not to shut any sites
until next year.

Refining margins are likely to
remain weak for the next one to two years, Fitch Ratings said
in a July 8 note. The agency may downgrade Eni from its A+ rating if its
restructuring efforts arent successful, it said.

Refining closures are not a should we but a
we must given declining Italian demand and
consistent earnings losses, Clint wrote.
Enis decision to close the refineries is bold but
necessary.

Kuwait Petroleum

Eni told the union at least three of its six refineries were
at risk of closing, according to a statement from the labor
union last week. It guaranteed continued operations at the
190,000 barrel-a-day Sannazzaro refinery, which got a new
diesel-producing unit in 2012, and at Milazzo, a joint
venture with Kuwait Petroleum Corp., according to the
statement. The two plants represent half of its capacity in
the country.

The company said at the meeting it wont go ahead with
investment at Gela, while the Taranto facility, the second
stage of the Venice plant conversion, and the chemicals site
at Priolo were at risk. The Livorno refinery, with a capacity of
84,000 barrels a day, wasnt mentioned in the statement.

Eni is 30% owned by the state, giving the prime minister
power to appoint the CEO. Renzi, Italys youngest-ever
premier and an advocate of labor-market deregulation, picked
a fight with CGIL union leader Susanna Camusso to win party
backing for a tax cut for low income workers.

The unions have to understand the music has
changed, Renzi said in a television interview earlier
this year.

Loss Deepened

Enis refining and marketing divisions loss
deepened to 159 million euros ($215.75 million) in the first
quarter from 51 million euros ($69.20 million) a year
earlier. Eni said April 29 it saw continuing weak
conditions and that it would persist with measures
including cost cuts, renegotiation of long-term gas-supply
contracts, and capacity restructuring to help support its mid
and downstream businesses.

European refining margins averaged $3.30 a
barrel in the first half of 2014, according to Fitch. That
compares with $4 a barrel in 2013 and $6.80 a barrel in 2012.
Total consumption of fuels in Italy fell 6% in May from a
year earlier, according to data by the Ministry of Economic
Development.

Enis six refineries process 774,000 barrels of oil a
day, according to data compiled by Bloomberg. Thats
about half of Italys total capacity. Eni had an agreement with the
labor union not to shut Italian refineries permanently until
this year, Scaroni said in 2012.

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